The effect of weather index insurance on social capital: Experimental evidence from Ethiopia

Halefom Nigus, Eleonora Nillesen & Pierre Mohnen

#2018-007

In this study, using data from lab-in-the-field experiment, we explore
whether the introduction of weather index insurance crowds in or crowds
out social capital in northern Ethiopia. We use contributions in the
public good game as a measure of social capital. We find that weather
index insurance crowds out social capital. The free-riding problem
created by the positive externality of weather index insurance and
development of self-sufficiency behaviour are found to be the causal
mechanisms behind the crowding out phenomenon. Our results indicate that
formal insurance mechanisms do not occur in a vacuum and may have
unintended effects. Hence, this study suggests that novel insurance
product design and marketing strategies should be used to ameliorate
such unintended effects.

JEL Classification: C93, G22, H41, O17

Keywords: Weather index insurance; social capital; public good game;
Ethiopia